Rand Merchant Bank Mozambique
Substantial investments in Mozambique’s coal and gas sectors will help to keep the economy on track this year, despite the effect of the two cyclones it experienced in March and April. Longer-term, Mozambique is expected to grow faster than its sub-Saharan neighbors.
It will take time to evaluate the full impact of the cyclones, Idai and Kenneth, but in the meantime, RMB’s Global Markets Research team expects the 2.5% growth in the gross domestic product (GDP) evident in the first half of this year will persist for the full year, RMB’s Sub-Saharan Africa economist Celeste Fauconnier says.
Deputy CEO of FNB Mozambique Paulo Pereira says that FNB Mozambique shareholders are confident that, in the medium to longer term, the Mozambique economy will benefit from investments in the hydrocarbons sector and the start of gas exports in 2023. FNB Mozambique is deeply invested in the transformation and repositioning of the bank to progress alongside market developments and remain resourceful and relevant to its clients.
In mid-May, Mozambique’s government approved the development of the Eni- and Exxon-Mobil-led Rovuma liquefied natural gas (LNG) project that will generate US$46 billion. Once the final investment decision is made, which is expected before the end of the year, work on the plant will begin. In June, Anadarko decided to proceed with the construction of a gas liquefication and export terminal to exploit one of the offshore LNG fields in Area 1 of the Rovuma Basin, a project worth USS$25 billion.
As a result of these developments, Mozambique’s GDP growth rate will reach double digits by 2023-24 and over the next five years, it is expected to far exceed the sub-Saharan African average annual growth rate of 3.9%.
This potential will support the attractiveness of Mozambican assets and the metical over the long term.
Writing in RMB’s latest Sub-Saharan Africa Mid-Year Update, Fauconnier says the recent cyclones have mainly affected Mozambique’s agricultural sector, because both crops and the infrastructure needed to transport agricultural goods were damaged. The cyclone struck on the eve of the country’s critical maize harvest, wreaking havoc to thousands of hectares of crops.
Agriculture is the largest employer in the country, so consumer demand will also be negatively affected.
Damage to roads, bridges and houses around Beira that lay on Cyclone Idai’s path of destruction have added price pressures, particularly in food, which has the largest weighting in the CPI index. This is likely to push inflation from its current low level of 3.9% in 2018 to an average of about 6% this year.
In 2020 and 2021, RMB expects depreciation of the metical, base effects and a weak agricultural sector will maintain inflationary pressures, but the effects will be contained.
The central bank, Banco di Mozambique, cut the benchmark policy rate to 12.25% in August in response to slowing inflation and weak demand, bringing cumulative cuts to 900 basis points since 2017. This has helped to support growth in demand for credit. The Banco de Mozambique MPC believes that given that growth rates are under pressure, there is room for another interest rate cut of 50 to 100 basis points in the fourth quarter/ first half of next year.
RMB however believes the space for further interest rate cuts is limited. Monetary policy is also unlikely to be tightened over the next two years, to avoid dampening economic growth.
In the absence of International Monetary Fund (IMF) support, and as the Mozambican government faces the necessity to spend on reconstruction, RMB expects the fiscal deficit will reach 6.5% of GDP in 2019 and 6% in 2020. It should narrow towards 2023 on the back of revenues from the oil and gas sector.
The government is finalising the restructuring of the US$726.5 million 2023 eurobond that it defaulted on in 2016, based on terms that are likely to be acceptable to parliament. This will be positive for the country’s debt sustainability in the medium to longer term.
Once finality on this restructuring is achieved, S&P and Moody’s have indicated they would review the country’s credit standing. Mozambique is currently rated as selective default by S&P, restricted default by Fitch, and Caa3 with a negative outlook by Moody’s.
RMB believes Mozambique’s longer-term potential as a gas exporter will help to mitigate significant weakness in the metical although there will be short-term pressure, which can be managed by tapping foreign reserves.
Recently the metical has appreciated on the back of reduced dollar demand reflecting policy interventions, conversions by investors and donors, and importers postponing forex purchases in anticipation of a more favorable rate.
While there will be some weakness in the currency in the short term, once gas production and exports begin in 2023, RMB expects the metical will strengthen.
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